Mortgage rates surpass 7%! High interest rates exacerbate the US "affordability crisis".

US mortgage rates have hit a more than 18-month high, deepening the home-buying affordability crisis for American residents and intensifying political pressure during the election season.

On Thursday, according to Freddie Mac data, the U.S. 30-year fixed mortgage rate rose to 7.03%, the first time it has reached that level since January 2025.

The 7% interest rate threshold is triggering a chain reaction among buyers, sellers, and developers. Combined with weak existing home sales and housing starts data released this summer, economists warn that the prospects for a recovery in the U.S. housing market, which has been stagnant for four years, are increasingly bleak.

Anthony Smith, senior economist at Realtor.com, said:

For both buyers and sellers, the highest mortgage rates in over a year and a half are occurring in a market that was already in a slowdown. The 7% level is less a mathematical shock than a psychological one, and it comes at a time when buyers should be the primary negotiators.

Interest rates break through psychological barriers, putting increasing pressure on the housing market.

While 7% does not have a specific economic threshold, its psychological effect should not be underestimated.

Prior to 2022, mortgage rates had never reached 7% since 2001, and for over two decades Americans had become accustomed to rates between 3% and 4% . During the pandemic, some buyers even completed home purchases at rates below 3%.

After interest rates surged in 2022, the housing market stagnated, with many buyers choosing to wait and see, hoping that interest rates would fall back to historic lows. However, four years have passed, and interest rates remain high.

In February of this year, mortgage rates briefly fell below 6%, the first time since 2022, which ignited enthusiasm for home buying, and the market generally expects the property market to recover during the spring peak season.

However, the outbreak of the conflict in Iran, coupled with rising oil prices and global trade disruptions that pushed up interest rates, dashed the hopes for a peak spring season.

Subsequently, as interest rates continued to rise, existing home sales continued to decline. Economists stated that some buyers, forced to make purchases due to life changes such as changing jobs or welcoming a newborn, did indeed drive some improvement in the market, but overall, the housing market is still awaiting a long-awaited recovery.

Brad Case, chief residential economist at Homes.com, points out that with inflation and economic uncertainty remaining high, the likelihood of a significant drop in interest rates in the short term is limited, and more and more buyers and sellers are being forced to accept this reality.

Meanwhile, the 15-year fixed mortgage rate also rose to 6.42% this Thursday, the highest level since May 2024.

Seller lock-in effect may be resurfacing.

In recent years, a large number of homeowners have refused to sell their properties because they are unwilling to give up low-interest mortgages, resulting in a persistent shortage of housing inventory.

This "lock-in effect" eased somewhat as some sellers realized that interest rates were unlikely to fall in the short term. In August, the number of existing homes available for sale in the United States rose to 1.62 million units, the highest level since 2019.

However, breaking the 7% interest rate barrier could undo this progress. Sellers are not only unwilling to exchange their low-interest 3% mortgages for new loans at 7%, but they also know that in a market environment where buyers' purchasing power is limited, they may have to lower their asking prices to attract buyers.

Economists predict that more homeowners will prefer to stay where they are and renovate their existing homes rather than sell and move.

Developers' profit margins are under further pressure

The high-interest-rate environment also poses multiple challenges to residential developers. With rising building material and labor costs and eroded profit margins, developers are generally resorting to interest rate subsidies to stimulate sales.

Further increases in mortgage rates will make the aforementioned incentives more expensive, directly dragging down developers' profits and suppressing their willingness to expand production capacity.

Housing affordability is one of the core policy issues of the Trump administration. The White House has instructed government-backed mortgage giants Fannie Mae and Freddie Mac to purchase mortgage-backed securities to lower borrowing costs and has implemented measures to restrict investors from acquiring single-family homes.

However, according to calculations by the Financial Times based on Zillow data, since Trump took office, home prices across the United States have risen by a cumulative 0.5%, while monthly rents have increased by 4.8%.

With the November midterm elections approaching and the Republican Party struggling to maintain control of both houses of Congress, the reality of high housing costs continues to test voters' sentiments.

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